Corporation Tax and High rate tax payer together

somethingottagive

Hello all,

Me and my friend have been discussing this scenario and got ourselves confused, so I really hope someone can help to shed some light on this one. Any help would be much appretiated.

Let's say a person owns a corporation and pays corporation tax (19%) and he is a high rate tax payer as well. Lets use 100 GBP revenue in my example.

On the 100 GB he pays:
Corporation tax 19% - 19.00 GBP
So the person "takes home" 81 GBP. Out of that 81 GBP he pays tax of 40% (high rate) which is 32.40 GBP
Total tax paid: 19+32.40=51.4
So it is 51.4% from 100.00 of originale "before tax" that he pays to HMRC which does not make financial sense to me if I own a business for example? If I add all these taxes together if that make sense?
Does it sound right? and please correct me if I am wrong.

Thank you in advance

Andy_L

Corporation tax is only paid on the Company's profits, so it won't be paid on that £100 as well as income tax

ETA: I'm assuming that the £100 is a salary payment rather than a dividend, is that right?

DE_612183

salary is a deductible expense - so in your example - your turnover is £100
You pay "salary" of £60

Corp Tax is Paid on  £40 @ 19%
PAYE is paid on £60 ( but don't forget as the company owner you pay Employee and Employer NI contricbutions )

You can also reduce the £40 by paying money into a Pension, as well as taking dividends rather than salary.

There are a few calculator out there which will work it out for you - I think a good site is ContractorUK

InMyDreams

Hi somethingottagive, so any misconceptions there it's hard to know where to start.

Firstly, it's important to distinguish between the person who owns the company and the company itself. Both entirely separate legal entities and subject to completely separate taxes. Which is why the company really needs an accountant. And probably the owner too.

Secondly, as Andy says, corporation tax is paid on company profits, not revenue.

Thirdly, as DE says, salary would be an expense to the company, so any salary paid to the director would be deducted (along with other expenses such as company accountancy fees) before the profits figure (and then corporation tax) was calculated.

Which makes me suspect that in your example, even you are not actually sure what the £100 represents, but I suspect that you were thinking neither 'salary' as Andy surmised nor 'turnover' as DE suggested but something confused in between.

To clarify DE's points:

• paying into a pension for the owner would also be a company expense (reducing company profits and therefore corporation tax) and can also be exceptionally tax favourable for the owner, but there are strict limits. And of course the owner doesn't get to 'take home' any of this until they retire.
• paying dividends is not a company expense - this would be done from profits after corporation tax had already been calculated and deducted. The owner would also pay income tax on any dividends, but never at 40%. There are different rates for dividends and actual rate would depend on the owner's (not the company's) circumstances.

Oh and I concur with DE - don't forget national insurance - potentially payable by both the owner personally on any salary received and additionally by the company as an employer.

somethingottagive

Andy_L said:

ETA: I'm assuming that the £100 is a salary payment rather than a dividend, is that right?

That is correct, thank you - makes sense

somethingottagive

DE_612183 said:

salary is a deductible expense - so in your example - your turnover is £100
You pay "salary" of £60

Corp Tax is Paid on  £40 @ 19%
PAYE is paid on £60 ( but don't forget as the company owner you pay Employee and Employer NI contricbutions )

You can also reduce the £40 by paying money into a Pension, as well as taking dividends rather than salary.

There are a few calculator out there which will work it out for you - I think a good site is ContractorUK

Thank you for the explanation - it is starting to click together now. And I will definitely check out the web site. Thanks!

somethingottagive

InMyDreams said:

Hi somethingottagive, so any misconceptions there it's hard to know where to start.

Firstly, it's important to distinguish between the person who owns the company and the company itself. Both entirely separate legal entities and subject to completely separate taxes. Which is why the company really needs an accountant. And probably the owner too.

Secondly, as Andy says, corporation tax is paid on company profits, not revenue.

Thirdly, as DE says, salary would be an expense to the company, so any salary paid to the director would be deducted (along with other expenses such as company accountancy fees) before the profits figure (and then corporation tax) was calculated.

Which makes me suspect that in your example, even you are not actually sure what the £100 represents, but I suspect that you were thinking neither 'salary' as Andy surmised nor 'turnover' as DE suggested but something confused in between.

To clarify DE's points:

• paying into a pension for the owner would also be a company expense (reducing company profits and therefore corporation tax) and can also be exceptionally tax favourable for the owner, but there are strict limits. And of course the owner doesn't get to 'take home' any of this until they retire.
• paying dividends is not a company expense - this would be done from profits after corporation tax had already been calculated and deducted. The owner would also pay income tax on any dividends, but never at 40%. There are different rates for dividends and actual rate would depend on the owner's (not the company's) circumstances.

Oh and I concur with DE - don't forget national insurance - potentially payable by both the owner personally on any salary received and additionally by the company as an employer.

Sorry for the confusion, should've explained a little better myself - me and my friend were using the 100 in our argument as the company revenue before any deductions if it helps. I guess we got ourselves confused with using revenue where really we were referring to profit. Oh well a bottle of Merlot definitely got in a way of explaining ourselves more professionally! Now after your explanation it makes perfect sense. Thank you for taking time to explain it! Much appretiated